What are Bad Loans?
In layman terms a bad loan is a loan which the “borrower” is unable to repay the “lender” as per the loan agreement, and which further becomes a bad debt, which in course is never repaid to the creditor due to the debtor declaring bankruptcy. Henceforth, this bad debt is declared as an expense by the debtor.
The Plight: Causes & Effects
Over the past few years, the investors in the emerging markets sought higher yields, which initially brought down borrowing costs with an added bonus of liquidating them, but, since the domestic interest rates were rising to curb inflation, the economic growth hindered, and to add salt on to the wounds, there is still an influx and increase in the inflow of borrowers, who are failing to pay their loans back to the lenders.
According to Saswata Guha, director of Fitch Ratings India (financial institution) “Such phenomena must essentially be monitored to provide for counter measures by the public sector banks, the nature of bad loans economic reality of this stature, is something that has to be addressed above the economic environment”
According to the reserve bank of India, the 2015-16 fiscal year saw state banks receiving a 140 billion rupee infusion, which went up from 125 billion rupees on the previous fiscal year , it also stated (RBI) that Public-sector lenders reign their dominance in the Indian banking system which carry 90% of India’s bad and stressed loans.
The major cause in this regard is due to the very fact that there is less diversification of the public lenders who seek to make profits from the difference between the interest earned from assets and on which the interest rate is paid on deposits in their loan portfolio. They lend more to big, government-controlled companies as well as Start-up businesses due to the factors pertaining to political environment pressures and government policies and laws. On the other hand iron and steel companies, followed by real estate companies, are amongst the biggest defaulters, and thus, have become a matter of concern for the public sector banks.
According to K.R. Kamath, Punjab National Bank (Chairman), the global slowdown following 2008 has brought drawback to borrowers, they face the difficulty to pay back loans. The bank’s profit slumped 53% to 5.05 billion rupees in the fall of the quarter, as the bad loan burden elevated to 5.14% of its loan portfolio.
Fact As Is:
The ratio of Non-Performing Loans at the Indian banks is the highest in the Asian continent, as per the World Bank, due to the understating of their bad loans ,where on the other hand they (Banks) try to recover the money from their borrowers via legal measures, but the borrowers counter the measures and mostly resort to filing an injunction to procrastinate the matter, and due to this, and as per to the RBI with the end of the 2015-16 fiscal year, a total of 1 trillion rupees is still under the recovery process, albeit public banks had a mere success to at least recover a mere 22% of the amount.
In a report published by the Times of India, stated that the Punjab National Bank reported a net loss of Rs. 5,367.14 crore; as on march 31, 2016, on the basis of higher provisioning for bad loans, which recorded as the biggest quarterly loss since the inception of Indian Banking Industry and within that quarter the sigma income decreased 1.33% to Rs. 13,276.19 crore from Rs. 13,455.65 crore a year ago. Overall the financial year (2015-16) of PNB reported that the total income during the year rose to Rs. 54,301 crore as against Rs. 52,206 crore in the previous fiscal.
Certain banks have proposed to initiate a report on the borrowers incapacity during the early stages of such struggling and thereby, also reprimanding borrowers for their non-timely payments. And according to the Reserve Bank of India, it wants banks to set-up adequate provision for tackling these troubled accounts by classifying these troubled accounts as Non-Performing Assets.